This article is intended for general informational purposes only and does not constitute legal advice. California law and tax rules are subject to change, nuance, and interpretation beyond the scope of this article. Readers should consult qualified legal counsel and tax professionals regarding their specific circumstances.

The Estate Planning Demystified article series walks through the essential aspects of California estate planning to help make it more accessible to you. Estate planning is about making deliberate decisions now so that your assets go where you intend, your loved ones are protected, and your wishes are honored if you can no longer speak for yourself.

Our first article discussed some of the key features of wills and trusts. The second article in the series covered incapacity documents and probate. Here, we review the tax landscape.

Current Tax Rules Affecting Estate Planning

Effective estate planning requires an understanding of four distinct tax regimes: gift tax, estate tax, generation-skipping transfer tax, and income tax (including the treatment of basis). California also imposes its own property tax rules that significantly affect planning for real estate.

Gift Tax and Estate Tax: The Unified Exemption

In many respects, it's better to give assets to your loved ones while you're still alive rather than after you pass away. If you have the means, giving today allows your loved ones to benefit from your gifts immediately and provides you with the enjoyment of seeing your gifts improve their lives. The federal gift tax applies to lifetime transfers of property for less than full and adequate consideration. The estate tax applies to transfers at death. Together, these taxes are governed by a unified exemption: each individual may transfer up to the exemption amount — free from federal gift and estate tax — through any combination of lifetime gifts and testamentary transfers. See below for a discussion of the income tax aspects of gifting.

With the passage of the One Big Beautiful Bill Act (OBBBA), signed into law on July 4, 2025, the federal estate, gift, and generation-skipping transfer tax exemption was increased to $15 million per individual effective January 1, 2026 — up from $13.99 million in 2025. For married couples, proper use of the portability election effectively doubles the combined exemption to $30 million. Beginning in 2027, the exemption is indexed annually for inflation.

In addition to the unified exemption, individuals may also make annual exclusion gifts of up to $19,000 per recipient per year without gift tax consequence. Direct payments of tuition to educational institutions and payments directly to medical providers are also excluded from gift tax entirely, with no dollar limit.

For gift tax purposes, the value of a gift is its fair market value on the date of the gift. For estate tax purposes, assets are valued as of the date of death. The personal representative has nine months from the date of death (plus a six-month extension if requested) to file the federal estate tax return on IRS Form 706.

Portability

For married couples, the estate tax system includes an important provision called portability. If the first spouse to die does not use the entirety of their available exemption, the surviving spouse may elect to apply the deceased spouse’s unused exemption amount (DSUEA) to their own transfers. This election must be made on a timely filed estate tax return.

Permissible deductions when calculating the taxable estate include non-recourse debts, funeral expenses, legal and administrative fees, charitable bequests, and gifts to a surviving U.S. citizen spouse (the “unlimited marital deduction”). Note that the unlimited marital deduction does not apply to transfers to a non-U.S. citizen spouse.

Generation-Skipping Transfer Tax

The Generation-Skipping Transfer (GST) Tax is a separate federal tax imposed on transfers — whether during lifetime or at death, outright or in trust — to “skip persons.” A skip person is generally an unrelated individual who is more than 37½ years younger than the transferor, or a related person who is two or more generations below the transferor (such as a grandchild). The GST Tax exemption mirrors the unified estate and gift tax exemption: $15,000,000 per person ($30,000,000 per married couple through portability), with a 40% tax rate on transfers in excess of the exemption.

Income Tax: Basis Planning for Gifts or Transfers

Income tax basis — the value used to calculate gain or loss on the sale of an asset — is often the most important tax variable in estate planning for moderate estates.

• Testamentary Transfers (Stepped-Up Basis): Beneficiaries who receive assets at death generally take those assets with a basis equal to the fair market value as of the date of death. This “step-up in basis” eliminates the income tax on all appreciation that occurred during the decedent’s lifetime.

• Lifetime Gifts (Carryover Basis): Donees who receive assets as gifts during the donor’s lifetime take a carryover basis — the donor’s original cost basis transfers to the recipient. Any built-in gain is preserved and will be recognized when the donee later sells the asset.

The practical implication: highly appreciated assets are generally better transferred at death to capture the step-up in basis, while depreciated assets (or assets with minimal appreciation) may be more tax-efficient to gift during lifetime.

California Property Tax: The Impact of Proposition 19

California’s Proposition 19, which took effect in February 2021, significantly narrowed the property tax reassessment exclusions that had long been a cornerstone of California estate planning.

Prior to Prop 19, parents could transfer real property — including investment property — to their children while preserving the property’s original Prop 13 assessed value. Prop 19 eliminates this broad exclusion. Today, the parent-to-child reassessment exclusion is available only when all of the following conditions are met:

• The property transferred is the parent’s principal residence;

• The transferees (children or grandchildren) move into the property as their principal residence within one year of the transfer and apply for the homeowner’s exemption within that same year; AND

• The property’s fair market value does not exceed the sum of the property’s existing assessed value plus $1,000,000.

Where the fair market value exceeds that threshold, only a partial exclusion applies. Investment and vacation properties no longer qualify for the parent-to-child exclusion under any circumstances.

Limited reassessment exclusions also apply in certain entity contexts: a transfer of 50% or less of ownership interests in a legal entity holding real property is excluded from reassessment, as is a transfer between an individual and a legal entity that results solely in a change in the method of holding title without any change in proportional beneficial ownership.

Putting It All Together

A complete California estate plan typically includes a revocable living trust, a pour-over will, an advance health care directive, and a durable power of attorney — along with proper funding of the trust and beneficiary designation reviews for retirement accounts and insurance policies. For larger estates, tax planning may also call for irrevocable trust structures, annual gifting programs, or other strategies tailored to the family’s circumstances.

Estate planning is not a one-time event. It should be reviewed after major life changes: marriage, divorce, the birth of children or grandchildren, significant changes in net worth, a move to a different state, or changes in applicable law.

If you haven’t read them already, be sure to check out the other articles in our Estate Planning Demystified series: Part 1 of 3: Wills and Trusts and Part 2 of 3: Incapacity Documents and Probate. Together, these articles highlight key aspects of estate planning to help you understand how you can ensure your assets go where you intend, your loved ones are protected, and your wishes are honored if you can no longer speak for yourself.

Please reach out to us at admin@petrulisfs.com if you need fiduciary support.

This article is intended for general informational purposes only and does not constitute legal advice. California law and tax rules are subject to change, nuance, and interpretation beyond the scope of this article. Readers should consult qualified legal counsel and tax professionals regarding their specific circumstances.